Opinion
Docket Nos. 13283 13284 13285.
1948-03-10
GABE P. ALLEN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.THEO. W. PINSON, PETITIONER v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.ZACH. K. BRINKERHOFF, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
George S. Atkinson, Esq., Tom D. Rhodes, Jr., Esq., and Luke B. Garvin, C.P.A., for the petitioners. John W. Alexander, Esq., for the respondent.
Corporation exchanged mortgaged real estate for unencumbered properties, plus cash. Its vendees took the real estate subject to the mortgage and did not assume it. Held, in computing the amount of the gain which is to be recognized under the provisions of section 112(c)(1), I.R.C., the amount of the mortgage indebtedness is to be treated as ‘other property or money‘ received in the exchange, and inasmuch as this amount plus cash received exceeds the amount of realized gain, the entire gain is taxable. Brons Hotels, Inc., 34 B.T.A. 376, and Estate of Theodore Ebert, Jr., 37 B.T.A. 186, followed. George S. Atkinson, Esq., Tom D. Rhodes, Jr., Esq., and Luke B. Garvin, C.P.A., for the petitioners. John W. Alexander, Esq., for the respondent.
The respondent determined a deficiency of $63,674.30 in income tax against the Allen Building Co. for the part of the year 1944 from January 1 to January 31 during which this corporation was in existence. Other deficiencies, determined for the years 1942 and 1943, have been paid in full. In the deficiency letters transferee liability was asserted against the petitioner as follows:
+-------------------------------+ ¦Gabe P. Allen ¦$66,098.98¦ +--------------------+----------¦ ¦Theo. W. Pinson ¦55,865.87 ¦ +--------------------+----------¦ ¦Zach. K. Brinkerhoff¦66,098.98 ¦ +-------------------------------+
The petitioners admit that they are transferees.
The sole question is the amount of taxable gain to be recognized in connection with an exchange by the Allen Building Co. of encumbered real estate for unencumbered property and a certain cash payment. The property alienated by the Allen Building Co. at the time of the exchange was encumbered by a mortgage in the amount of $599,839.24. The property was accepted by the purchasers subject to this mortgage, but the purchasers did not assume the payment of the mortgage.
FINDINGS OF FACT.
The Allen Building Co. was incorporated in Texas in1932. It filed its corporation income and declared value excess profits tax return with the collector of internal revenue at Dallas, Texas.
The principal asset of the Allen Building Co. was land located in Dallas, Texas, with a building situated thereon known as the Allen Building. The company was incorporated with paid-in capital of $30,000, and it acquired the land and building either by assuming a mortgage of $800,000 or by accepting the property subject to the mortgage. On nOvember 12, 1938, the company refinanced the mortgage indebtedness against the property and the loan thereon by signing a note for 4800,000 payable to the Massachusetts Mutual Life Insurance Co., secured by a deed of trust dated November 12,1938, signed by the company.
The Allen Building was an office building consisting of eighteen stories and basement. Income was realized from the rental of the ground floor, which was occupied by storerooms for retail business, and from the rental of office space on the upper floors.
On December 22, 1943, the Allen Building Co. entered into a contract with T. F. Keasler and T. K. Irwin. This contract provided that the company was to exchange its land and building thereon, known as the Allen Building, for the sum of $62,500 in cash and severn parcels of rental real estate in Dallas, Texas, owned by T. F. Keasler and T. K. Irwin. The contract provided that the seven parcels of real estate were to be transferred to the Allen Building Co. free and clear of all liens and encumbrances, and it also provided that Keasler and Irwin should take the land and building transferred to them by the Allen Building Co. subject to the mortgage indebtedness, which they did not assume. Keasler and Irwin did assume the payment of city taxes for the year 1944 and for the last half of the year 1943, and all county taxes against the property for the year 1944.
On January 20, 1944, the contract was carried out in accordance with its terms. On that date the land and building situated thereon, known as the Allen Building, had an adjusted cost basis to the Allen Building Co. of $657,154.94, and the seven rental properties received by the Allen Building Co. had a fair market value of approximately $304,282.46. On the same date the unpaid balance on the Allen Building mortgage indebtedness amounted to $599,839.24.
On January 31, 1944, the Allen Building Co. distributed all of its assets in complete liquidation to the petitioners herein, and was dissolved.
The expenses incurred in connection with the sale reduced the amount of cash realized by the Allen Building Co. from $62,500 to $24,358.26. In its income tax return for the month of January 1944 the Allen Building Co. reported the amount of $24,358.26 as a long term capital gain. In the same return it reported its cost or other basis of property sold to be $862,223.54, depreciation allowed since acquisition $196,067.70, and gross sale price $723,816.60.
The purchasers of the Allen Building paid the mortgage in full on November 1, 1945, through a refinancing arrangement, and the Allen Building Co. was released from all obligation at the time of the refinancing.
The respondent determined that the Allen Building Co. realized a gain of $282,648.68, and that the entire amount of the realized gain was taxable.
OPINION.
HARLAN, Judge:
The respondent computes the gain realized by the Allen Building Co. as follows:
+------------------------------------------------------+ ¦Property received by Allen Building Co.: ¦ ¦ +-------------------------------------------+----------¦ ¦Cash ¦$24,358.26¦ +-------------------------------------------+----------¦ ¦Mortgage on Allen Building ¦599,839.24¦ +-------------------------------------------+----------¦ ¦Unpaid taxes ¦11,333.66 ¦ +-------------------------------------------+----------¦ ¦Other properties ¦304,282.46¦ +-------------------------------------------+----------¦ ¦Total ¦939,813.58¦ +-------------------------------------------+----------¦ ¦Property transferred by Allen Building Co.:¦ ¦ +-------------------------------------------+----------¦ ¦Allen Building (adjusted basis) ¦657,154.94¦ +-------------------------------------------+----------¦ ¦Gain ¦282,658.64¦ +------------------------------------------------------+
The applicable provisions of the Internal Revenue Code are subsections (b)(1) and (c)(1) of section 112, shown in the margin.
SEC. 112. RECOGNITION OF GAIN OR LOSS.(b) EXCHANGES SOLELY IN KIND.—(1) PROPERTY HELD FOR PRODUCTIVE USE OR INVESTMENT.— No gain or loss shall be recognized if property held for productive use in trade or business or for investment (not including stock in trade or other property held primarily for sale, nor stocks, bonds, notes, choses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest) is exchanged solely for property of a like kind to be held either for productive use in trade or business or for investment.(c) GAIN FROM EXCHANGES NOT SOLELY IN KIND.—(1) If an exchange would be within the provisions of subsection (b)(1), (2), (3), or (5), or within the provisions of subsection (1), of this section if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph or by subsection (1) to be received without the recognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property.
The respondent admits that, were it not for the cash and mortgage items, the exchange here in controversy would be within the provisions of subsection 112(b)(1). He contends, however, that the cash and mortgage indebtedness constitute ‘other property or money‘ received in the exchange, and, inasmuch as these two items exceed the amount of the gain realized, the entire gain must be recognized for tax purposes under the provisions of section 112(c)(1).
The petitioners contend that, since the Allen Building Co. only realized $24,358.26 in cash, after deducting sales and other necessary expenses, a gain of that amount and no more should be recognized. They urge that the indebtedness of the Allen Building Co. secured by deed of trust upon the land and building in the amount of $599,839.24 at the time of the exchange is not ‘other property or money‘ within the meaning of section 112(c)(1), and this is the basic point on which the parties disagree.
The question raised by the contentions of the parties has heretofore been considered by this tribunal. In fact, petitioners on brief refer to Brons Hotels, Inc., 34 B.T.A. 376, and Walter F.Haass, 37 B.T.A. 948, wherein the owner of mortgaged real estate exchanged it for other property, the purchaser paying cash and assuming the mortgage, and to Estate of Theodore Ebert, Jr., 37 B.T.A. 186,wherein the facts were substantially the same except that the purchaser took over the property subject to the mortgage and did not assume it. In each of those cases we held that the mortgage indebtedness constituted ‘other property or money‘ within the meaning of section 112(c)(1), and set forth in detail the reasons which required such a conclusion. No useful purpose would be served by again repeating them. Cf. Crane v. Commissioner, 331 U.S. 1.
The case of Commissioner v. North Shore Bus Co., 143 Fed.(2d) 114, cited and relied upon by the petitioners, is distinguishable on its facts. In that case the petitioner owned ten old coaches which were fully depreciated. It traded them in on ten new coaches, and was allowed a trade-in value of $30,000 on the old coaches. In working out the trade, the petitioner received a check in the amount of $24,000 from the Twin Coach Corporation, the seller of the new coaches, with the understanding that this $24,000 was to be used in paying off a mortgage in that amount which petitioner owed on the old coaches. This was done and the $6,000 remaining on the allowance was applied on the payment of the new coaches. The Circuit Court of Appeals for the Second Circuit held that the petitioner in that case was simply a conduit through which funds passed from the Twin Coach Corporation to the mortgagee, and stated that the transaction ‘increased the secured debt which the respondent owed Twin Coach by the amount of the check, and at most enabled it to exchange creditors when it discharged the old mortgage.‘ In other words, one debt was merely substituted for another and, when the transaction was completed, the petitioner received nothing out of the exchange save new busses. That is not the situation in the instant proceeding.
Our conclusion is that the mortgage indebtedness of $599,839.24 must be treated as ‘other property or money‘ received within the meaning of section 112(c)(1), supra, and, inasmuch as this indebtedness plus the cash realized is in excess of the gain realized by the Allen Building Co., the entire amount of the gain is taxable.
Decision will be entered for the respondent.